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The RBI accepted the entire ₹71,971 crore worth of bids received in the overnight VRRR auction, against a notified amount of ₹75,000 crore. The bids were accepted at a cut-off and weighted average rate of 5.24%.
The central bank has been conducting VRRR auctions to absorb excess funds from the banking system and keep overnight money-market rates aligned with the policy repo rate.
RBI data showed banking-system liquidity was estimated to be in surplus of around ₹4.92 lakh crore as of September 21. The surplus has been supported by large foreign-currency non-resident deposit inflows, government spending and other liquidity conditions.
The RBI has also been using open-market operations to manage the excess liquidity. Government securities worth ₹50,000 crore and ₹25,000 crore were sold through OMO operations on September 17 and September 21 respectively, with another ₹25,000 crore sale scheduled for September 28.
Alongside its liquidity-management measures, the RBI has cautioned banks against competing too aggressively on loan pricing.
According to The Economic Times, RBI Deputy Governor Rohit Jain conveyed the concern during a meeting with senior bankers. The central bank is concerned that excess liquidity could encourage lenders to reduce lending standards or offer loans at increasingly competitive rates simply to deploy their surplus funds.
The concern is that aggressive lending could create credit-quality problems in the future, particularly if banks expand lending into riskier segments without adequate assessment.
Banks are also looking toward stronger credit demand, particularly in retail lending, to deploy available funds. According to the report, year-on-year retail credit growth was around 16%, compared with overall credit growth of slightly below 19%.
The RBI therefore faces the challenge of balancing surplus liquidity with financial stability while ensuring that banks continue to maintain prudent lending standards.
